2. John Babbit
Partner, Life Sciences,
Transaction Advisory Services
EY

3. Progressions
Navigating the payer landscape
MEDTECH2014
Redefining Innovation in the Face of Healthcare Reform
Global Life Sciences
Report 2014

4. A long tradition of industry insights
Page 4
Progressions 2014
Global life sciences report
Navigating the payer landscape
Beyond borders 2014
Global biotechnology report
Pulse of the industry 2013
Medical technology report

5. Headlines
Page 5

6. Global medtech headlines
► The leading challenge facing medtech companies is to find ways
to differentiate themselves and their products in an increasingly
commoditized market.
► The search for growth takes a few new twists.
► Record fundraising – large debt offerings to fund stock buy-backs,
Page 6
M&A
► Venture backed capital increases and the return of the IPO market
► M&As including megadeals on the rise
► Inversions
► Current market trends point toward sustained M&A activity

7. Overview: Follow the money
2013 by the numbers
Page 7
Global
market cap
65%
Follow-ons
raise
US$9.4b
(Second
highest total
since 2008)
IPOs raise
US$3.5b
(Second only
to 2000)
Broader
market rally
Product
successes
(led by
a few US
commercial
leaders)
Global
revenues
10%
(best showing
since GFC)
Global R&D
14%
(outpacing
revenues for
first time since
GFC)
Global net
income
15%
Variance
across key
markets
Global numbers dominated by strong US performance
In Europe, Canada and Australia  product and financing story not as strong;
companies more cautious about R&D spending

8. Financial performance
Behind the numbers
Page 8

9. Global Med Tech/Dx Market Trends
Large cap Med Tech trends reflect issues faced by pharma more than a decade ago
► The medical technology sector is
weathering a perfect storm caused by
three concurrent trends: the move toward
value-based health care, growing
regulatory pressures and resource
constraints within the industry itself
► Med Tech’s customer base is shifting as
payers, health systems and patients
become more influential than they have
been in the past. This shift undermines
Med Tech’s fundamental business model.
Companies must find new ways to create,
deliver and capture value.
► Unfortunately, companies of all sizes face
significant resource constraints precisely
when they need to be investing in new
kinds of innovation. Financing has become
increasingly scarce for small companies.
► Although US continues to dominate the
global Med Tech market, China and India
have the highest expected growth rates
Source: Capital IQ and EY analysis
Page 9
Page 9
8.7%
Top 10 Medical device companies revenue
7.5%
2.4%
4.6%
growth story
4.1% 4.5%
1.1%
3.9%
5.3%
4.3%
2007 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E

10. US/EU financial performance
Pure-play companies – 2013
Page 10
Net income(US$b) +16%
20
15
10
5
Employees (000s) +5%
750
500
250
0
2012 2013
Revenues (US$b) +5%
200
150
100
50
R&D expense (US$b) +7%
15
10
5
0
2012 2013
0
2012 2013
0
2012 2013
Source: Ernst & Young, Capital IQ and company financial statement data.

11. Medical technology at a glance, 2012-13
(US$b, data for pure-plays except where indicated)
Page 11
GSK Q2’13 results

12. Selected US medtech public company financial
highlights by region, 2013 (US$m, % change over 2012)
Page 12
GSK Q2’13 results

13. US market capitalization relative to leading
indices
Page 13

14. M&As in US and Europe
Page 14

15. Portfolio rationalization
Page 15

16. In both the US and Europe, biotech stocks
outperformed broader indices
► US market capitalization relative to leading indices
► In Europe, a similar trend. Year-over-year market capitalization of
European biotechs increased 60% ( as of January 2013)
Page 16

17. Financial performance: The big picture
Revenues near US$100b
Page 17
In US$b
Beyond borders − EY global biotechnology report 2014

18. Financing: The big picture
IPOs return to US, Venture holds steady
Page 18
Beyond borders − EY global biotechnology report 2014

19. Innovation capital rebounds in US & Europe
Page 19
Beyond borders − EY global biotechnology report 2014

20. In the US, IPOs bounce back to the future
3.5
3.0
2.5
2.0
1.5
1.0
0.5
Page 20
40
35
30
25
20
15
10
5
0
0.0
Amount raised Number of IPOs
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Amount raised (US$b)
Number of IPOs
Beyond borders − EY global biotechnology report 2014

21. Mergers & acquisitions
Biotechs buying, pharma in retreat
Page 21
Beyond borders − EY global biotechnology report 2014

22. In US, new drug approvals return to historic
average
Page 22

23. Point of view
Redefining innovation
Page 23

24. A perfect storm
Three trends are disrupting medtech
Page 24
The move to
value-based health care
Regulatory pressures
Resource constraints
1
2
3

25. The move to value-based health care
Escalating costs
Budgetary
pressures
Large unmet
needs
Page 25
Value-based health care:
►Comparative effectiveness
research
►Health technology assessments
►Accountable care organizations
►Disease management programs

26. Regulatory pressures
Page 26
US 501(k) process reform
Sunshine Act
Proposed PMA process for
Class III devices in Europe
Increased uncertainty 
impact on investment

27. Resource constraints
Innovation capital in the US and Europe
Page 27

28. Medtech revenue growth has slowed,
dragging down R&D spend…
Page 28

29. …leading to “lost” revenues of US$131
billion…
Page 29

30. …and leading to “lost” R&D spending of
US$12 billion
Page 30

31. Healthcare budgets have stagnated for the
first time in years
15%
10%
5%
0%
-5%
-10%
-15%
Page 31
Average annual growth in health spending
across OECD countries in real terms, 2000-2011
2000-09 2009-11
Source: OECD
Growth rates for Australia, Denmark, Japan, Mexico and Slovak Republic refer to 2009-10 instead of 2009-11
Growth rates for 2009-11 are not available for Luxembourg, and Turkey.

32. Page 32
Implications for the Life
Sciences business model

33. Life Science’s "new" customers:
an expanding customer base
► Value-based health care
► New incentives
Page 33
Payers
► Greater financial risk
► More control over health
decisions
► Consolidation
► Centralized purchasing
decisions
Patients
Hospital systems

34. Expanding beyond traditional product
offerings in three new ways
Page 34
Beyond the product
► Services and solutions
► Standalone offerings or
complementary to existing
products
Beyond treatment
► Across the cycle of care
► Prevention,
disease management,
remote monitoring, etc.
Beyond the hospital
► Mobile products and services
that keep patients out of the
hospital
► "Health care everywhere"

35. Expanding beyond traditional
business models
Page 35
Beyond the
product
Beyond the
hospital
Beyond
treatment
GE Healthcare’s Transforming Cities campaign
Working with providers, payers and patients to monitor and improve health
outcomes in selected cities’ populations
  
Baxter/Chinese National Institute for Hospital Administration
Deploying sustainable care and delivery models for dialysis patients

Medtronic/Cardiocom (acquisition)
Medtronic’s moves into services by acquiring a telehealth devices company
  
Covidien’s Sandman program
Improving sleep disorder treatment with patient education and encouragement
  
GE Healthcare’s Get Fit campaign
Via behavioral economics, urging patients to adopt healthy lifestyles
  
Medline’s Advancing Health Together program
Tools, services and education to help nursing facilities improve quality

Proteus Digital Health
Ingestible sensor inside pill to monitor adherence and key health indicators

Cardiio
Smartphone app that monitors heart rate using camera
 
Source: Ernst & Young, media reports

36. The pace of change

37. The pace of change is accelerating
Page 37
3-5 years ago Today 3-5 years from now
Early debate,
uncertainty about move
to value
Sweeping reforms in
US, Germany, France,
UK, others
P4P spreads to other
markets; specialty drug
prices  pressure on
drug costs increases
Most people had never
heard of “big data”
Growing number of
analytics initiatives
with large amounts of
diverse data
Real-world data,
prescriptive analytics
 pharma’s ability to
control message 
PI technologies were
novelties
Increasingly common;
Unobtrusive, non-invasive;
payers
starting to pay
Drugs increasingly
competing with non-drug
interventions, e.g.,
PI technologies
Much data opaque
(cost, quality,
relationships, clinical
trial data)
Transparency (apps,
govt. initiatives, “Bad
Pharma”, industry
responses)
Transparency 
scrutiny, pressure;
Trust a source of
competitive advantage

38. What’s ahead?
In 3-5 years, health care could look significantly different
For the first time, US patients
will carry smart cards
with all
their health information on them
— making it easy for providers
to quickly access their medical
histories.
Rita Shane, Cedars-Sinai
Page 38
big data
optimal treatments
Value-based pricing
US specialty drug costs
—
accounting for only 4% of
spending today, but growing at
20% annually — will face
unprecedented scrutiny.
Robert Galvin, Equity Healthcare
variation in care
Even after the European
economic crisis recedes, the
pressure from payers
will
continue to increase. There
simply isn’t enough money to
pay for health care in the
ways of the past.
Eduardo Sanchiz, Almirall
and
formal HTA processes are
going to become much more
visible in Switzerland.
Thomas Szucs, Helsana Group
Payers may challenge today’s
pricing environment, which
allows for annual price
increases on products.
Adrian Thomas, Johnson & Johnson
Formularies will be replaced by
“Population Health 2.0,” where
new tools and will
match individual patients to
at the time
of diagnosis.
Colin Hill, GNS Healthcare
Significant leading to poorer outcomes is
just not going to be acceptable.
Paul Bleicher, Optum Labs
The drive for transparency
will
accelerate dramatically. Many
are unprepared or simply
hoping it won’t happen, but it
will — and it’s a game-changer.
Jack Bailey, GlaxoSmithKline
Consumerization
is coming
sooner than most expect. More
and more US employers are
going to put workers on
insurance exchanges,
motivating patients to become
engaged consumers.
Romesh Wadhwani, Symphony
Health Solutions
In the Netherlands, decisions
that factor in cost-effectiveness
— so far, a politically touchy
matter — will become
unavoidable and very real.
Martin van der Graaff, Zorginstituut
Nederland

39. Non-Traditional Healthcare Player Transactions /
Alliances
► Technology leaders with size and scale see the
► ƒOverlap with existing technology applications /
Page 39
Broad Technology
Diversified / Government /
Business Services
Media/Communications /
Information Services
Select Potential
Buyers
Strategic
Rationale
Select M&A /
Partnerships
EY Perspective
fragmented, high growth HCT industries as very
attractive adjacencies
capabilities coupled with expertise in technology
service and consulting related solutions provide
synergistic cross selling opportunities
► While strategies may vary significantly, most broad
Technology leaders are either actively trying to
continue to build existing healthcare platforms or are
evaluating the sector to determine appropriate entry
point
► Leading multi-national / Diversified /
Government companies will continue to
view healthcare as a critical end market and
should be active in evaluating acquisitions
to further build their businesses
► Strategic approach to the healthcare sector
has varied as large media / communication /
information companies have been both
sellers (e.g. Thomson / Walters Kluwer) and
buyers (e.g. Verisk / Experian / Harris) in
recent years
► IBM / Wellpoint’s JV to leverage Watson to develop
evidence based protocols
► GE / Microsoft’s JV focus on healthcare infections
and chronic case management
► ƒOracle’s acquisition of Phase Forward (2011)
► ƒGoogle’s failed Google Health initiative and success
with Google Flu trends
► ƒLawson’s acquisition of Healthvision Solutions
(2010)
► Healthcare remains an attractive market for
traditional multinational / industrial
companies due to growth dynamics relative
to more mature business segments
► ƒBusinesses with strong service capabilities
(e.g. BAH, SAP, Deloitte) are attracted to
healthcare due to ability to utilize core
consulting expertise to impact the highly
complex and inefficient healthcare end
market
► ƒMedia / Communications companies have
traditionally viewed the healthcare sector as
a natural end-market for their core
businesses (e.g. Reed Elsevier, Thomson)
► ƒInformation Services companies have
recently been aggressive in building
healthcare segments via acquisition (e.g.
Verisk, Experian)
► ƒVerisk’s acquisitions of Bloodhound
Technologies (2011) and MediConnect
(2012)
► ƒExperian’s acquisition of Medical Present
Value (2011)
► ƒHarris Corporation’s acquisition of Carefx
(2011)
► ƒReed Elsevier’s acquisition of MEDai (2008)
► ƒMulti-nationals have large healthcare IT segments
built in part through acquisition:
► GE’s acquisition of IDX Systems (2005)
► Philips’ acquisition of VISICU (2007)
► ƒOther Diversified / Government focused
companies remain active healthcare acquirors:
► General Dynamics’ acquisition of
Vangent (2011)
► ADP’s acquisition of AdvancedMD (2011)

40. Surveying the payer landscape

41. Understanding payers
Payers want cost
containment and budgetary
certainty
Page 41
… they are less interested in
outcomes-based approaches
but
Drugs are 10% of health care
spending
… payers see drug costs as
the biggest problem
but
Pharma is generally well
aligned with payers on data
and CER measures
… there is a disconnect on
comparative trials
but
Payers are preoccupied with
implementation challenges
and need help
but … pharma has a trust deficit
…
…
…
…

42. Payers want cost containment and budgetary certainty
…
… but they are less interested in outcomes-based approaches

43. Drugs are 10% of health care spending
…
… but payers see drug costs as the biggest problem

44. Pharma is generally well aligned with payers on data and CER
measures
…
… but there is a disconnect on comparative trials

45. Payers are preoccupied with implementation challenges and need
help
…
… but pharma has a trust deficit
88%
78%
57%
47%
43%
20%
15%
13%
42%
67%
75%
67%
67%
50%
50%
25%
Drug prices are a major driver of health
care cost increases
Boosting drug adherence is critical for
lowering health care costs
Pharma companies have data that is
vital for measuring and improving
outcomes
With beyond-the-pill services, pharma
companies can be trustworthy partners
Pharma companies have data that is
credible for measuring and improving
outcomes
Pharma products are significantly
differentiated from the standard of care
With beyond-the-pill services, pharma
companies can be unbiased between
their products and those of competitors
Pharma companies bring affordable
products to market
Payers Pharma
Source: EY Progressions 2014 Payer Survey. Length of bars indicates percentage of respondents who strongly or somewhat agree with each statement

46. Navigating through complexity

47. A complex and fragmented landscape
The devil in the details
► Different standards and implementation
► Behavioral attributes
It’s all relative
► Disease segments
► Product types
► Influence of other KOLs
We’re all payers now
► Coverage  Pricing  Prescription
► New “payers”: providers, employers, patients
The challenge: understanding and strategically approaching a
large, fragmented market

48. Value
dossiers
Page 48
Personalized
medicine
Adherence
Decision
support
m-health
Prescriptive
analytics
Capitated
models
Drugs/devices Services and solutions
Health
care
delivery
Universal adoption Ad-hoc experiments Little/no
activity
Where’s pharma/medtech?

49. Guiding principles for navigating the payer landscape
Make the right comparisons
Payers and health care systems are changing rapidly. Focus on where the ball is
going to be, not where it has been.
1
Approach payers strategically and comprehensively
A complex, rapidly changing payer environment demands a strategic and
comprehensive approach.
2
Develop data-driven insights and interventions
Build the complete picture, target the small share of patients driving the bulk of
costs.
3
Create customer-centric solutions
Payers want solutions that look across disease franchises, span the cycle of care
and are unbiased between the products of different manufacturers.
4
Rebuild trust through transparency
Without trust, pharma’s data and solutions will get little traction with payers.
5

50. Thank you
Stay tuned!
Download the report:
ey.com/medtech
Participate in our blog:
LifeSciencesBlog.ey.com
Follow us on Twitter:
@EY_LifeSciences
Page 50

51. Pulse of the
industry 2014:
October 6th @
AdvaMed 2014
Page 51